Sadiq Khan hits out at Labour London mayoral "beauty parade"

The shadow London minister tells the New Statesman: "I’ve got no interest in being involved in a beauty parade" and accuses Labour's mayoral hopefuls of "playing ego politics."

Although there are no officially declared candidates (with the exception of transport expert Christian Wolmar), it often feels as if the race to be Labour's next London mayoral nominee has already begun. David Lammy, Tessa Jowell,  Andrew Adonis and Diane Abbott are all positioning themselves to stand, with a regular stream of op-eds and other interventions.

In an interview with me in tomorrow's NS, Sadiq Khan, who was appointed shadow minister for London in January, hits out at what he calls "a beauty parade" and accuses his Labour colleagues of "playing ego politics". When I asked Khan why he withdrew from a recent Progress debate on the future of capital, which featured Lammy, Jowell, Adonis and Abbott (the first hustings in all but name), he told me:

I was told it was going to be a forum to discuss ideas about London and it was quite clear to me that it was actually turned into a beauty parade. I’ve got no interest in being involved in a beauty parade, or playing ego politics. It’s about me making sure that I do the job I’ve been given as shadow minister for London with the seriousness it deserves. I’m a member of team Labour. My obsession is to make sure we do the best we can in the elections in May 2014.

As shadow minister for London, Khan enjoys the advantage of being able to prepare the ground for a future mayoral bid without being accused of "ego politics". When I pointed out that he was viewed as one of the frontrunners for the post, he notably refused to rule out a bid: "If others want to flatter me and throw me those compliments, I’m not going to reject them, but my focus is definitely on the jobs I’ve asked been by Ed Miliband to do."

Defends the mansion tax against Lammy, Jowell and Abbott

Khan also criticised Lammy, Jowell and Abbott after they denounced Labour's proposed mansion tax as a "tax on London" (at the Progress event) and warned that it would penalise the asset rich but cash poor. He said:

All I say to colleagues, in the kindest, politest way is, 'actually, you look at the bigger picture. Are you in favour of trying to help those who own the least by giving them a new rate of tax at 10p? If you are, then ask yourself how you go about doing that.' What I’d rather do is work collegiately with senior members of the Labour Party to find a policy that works, rather than going for the cheap soundbite, which doesn’t really address the issue of making sure that we’ve got a fair tax policy.

On Boris Johnson's Thatcher lecture: "simplistic snobbery"

In response to Boris Johnson's recent Margaret Thatcher lecture, in which he argued, "Whatever you may think of the value of IQ tests, it is surely relevant to a conversation about equality that as many as 16 per cent of our species have an IQ below 85, while about 2 per cent have an IQ above 130", Khan said:

"I took the trouble of reading the speech, as well as the soundbites, and it was a frankly offensive and ill-thought through speech for the mayor of London to deliver. For a candidate to be the next Conservative Party leader, I can see why a speech talking about the importance of having more grammar schools and rewarding the top 10% can be seen as an attractive speech. But actually, in a city where you’ve got cleaners, bus drivers, hospital porters, working incredibly hard, to make a speech talking about how the lowest 16% should basically just accept it, take it or leave it, and how those top 10% should be given automatic knighthoods, showed a lack of understanding about this city."

He added:

"Let me pose this challenge; if Barack Obama’s IQ was tested at age five, 11, 16 or 18, I doubt whether it would have been very high, he wasn’t necessarily a brilliant student, but he worked hard, he had aspiration, he reached for the top and he’s now president of the United States of America. Or if Nelson Mandela’s IQ had been tested three, five, seven, eight, 12...that sort of simplistic snobbery is not what we want the mayor of this great city to be talking about.

"What he should be saying is every child deserves to fulfil their potential, every school should be a good school, we want to make sure that everyone shares in the joys of London, whether it’s the arts, the culture, the theatre, the academics, every son or daughter of a bus driver, a cleaner, a hospital worker should recognise that the reason why your mum and dad people are doing those jobs is not because they’re not bright but because they’re very important jobs that need to be done in London.

"Give them pride in the work they’re doing. We are a London where we should be one city recognising that, to win the Olympics, the work of the construction worker was just as important as the work of Sebastian Coe."

Pick up tomorrow's New Statesman to read the interview in full. You can also listen to George discussing this interview with Sadiq Khan on the NS podcast:

Shadow justice secretary Sadiq Khan speaks at the Labour conference in Brighton earlier this year. Photograph: Getty Images.

George Eaton is political editor of the New Statesman.

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We're racing towards another private debt crisis - so why did no one see it coming?

The Office for Budget Responsibility failed to foresee the rise in household debt. 

This is a call for a public inquiry on the current situation regarding private debt.

For almost a decade now, since 2007, we have been living a lie. And that lie is preparing to wreak havoc on our economy. If we do not create some kind of impartial forum to discuss what is actually happening, the results might well prove disastrous. 

The lie I am referring to is the idea that the financial crisis of 2008, and subsequent “Great Recession,” were caused by profligate government spending and subsequent public debt. The exact opposite is in fact the case. The crash happened because of dangerously high levels of private debt (a mortgage crisis specifically). And - this is the part we are not supposed to talk about—there is an inverse relation between public and private debt levels.

If the public sector reduces its debt, overall private sector debt goes up. That's what happened in the years leading up to 2008. Now austerity is making it happening again. And if we don't do something about it, the results will, inevitably, be another catastrophe.

The winners and losers of debt

These graphs show the relationship between public and private debt. They are both forecasts from the Office for Budget Responsibility, produced in 2015 and 2017. 

This is what the OBR was projecting what would happen around now back in 2015:

This year the OBR completely changed its forecast. This is how it now projects things are likely to turn out:

First, notice how both diagrams are symmetrical. What happens on top (that part of the economy that is in surplus) precisely mirrors what happens in the bottom (that part of the economy that is in deficit). This is called an “accounting identity.”

As in any ledger sheet, credits and debits have to match. The easiest way to understand this is to imagine there are just two actors, government, and the private sector. If the government borrows £100, and spends it, then the government has a debt of £100. But by spending, it has injected £100 more pounds into the private economy. In other words, -£100 for the government, +£100 for everyone else in the diagram. 

Similarly, if the government taxes someone for £100 , then the government is £100 richer but there’s £100 subtracted from the private economy (+£100 for government, -£100 for everybody else on the diagram).

So what implications does this kind of bookkeeping have for the overall economy? It means that if the government goes into surplus, then everyone else has to go into debt.

We tend to think of money as if it is a bunch of poker chips already lying around, but that’s not how it really works. Money has to be created. And money is created when banks make loans. Either the government borrows money and injects it into the economy, or private citizens borrow money from banks. Those banks don’t take the money from people’s savings or anywhere else, they just make it up. Anyone can write an IOU. But only banks are allowed to issue IOUs that the government will accept in payment for taxes. (In other words, there actually is a magic money tree. But only banks are allowed to use it.)

There are other factors. The UK has a huge trade deficit (blue), and that means the government (yellow) also has to run a deficit (print money, or more accurately, get banks to do it) to inject into the economy to pay for all those Chinese trainers, American iPads, and German cars. The total amount of money can also fluctuate. But the real point here is, the less the government is in debt, the more everyone else must be. Austerity measures will necessarily lead to rising levels of private debt. And this is exactly what has happened.

Now, if this seems to have very little to do with the way politicians talk about such matters, there's a simple reason: most politicians don’t actually know any of this. A recent survey showed 90 per cent of MPs don't even understand where money comes from (they think it's issued by the Royal Mint). In reality, debt is money. If no one owed anyone anything at all there would be no money and the economy would grind to a halt.

But of course debt has to be owed to someone. These charts show who owes what to whom.

The crisis in private debt

Bearing all this in mind, let's look at those diagrams again - keeping our eye particularly on the dark blue that represents household debt. In the first, 2015 version, the OBR duly noted that there was a substantial build-up of household debt in the years leading up to the crash of 2008. This is significant because it was the first time in British history that total household debts were higher than total household savings, and therefore the household sector itself was in deficit territory. (Corporations, at the same time, were raking in enormous profits.) But it also predicted this wouldn't happen again.

True, the OBR observed, austerity and the reduction of government deficits meant private debt levels would have to go up. However, the OBR economists insisted this wouldn't be a problem because the burden would fall not on households but on corporations. Business-friendly Tory policies would, they insisted, inspire a boom in corporate expansion, which would mean frenzied corporate borrowing (that huge red bulge below the line in the first diagram, which was supposed to eventually replace government deficits entirely). Ordinary households would have little or nothing to worry about.

This was total fantasy. No such frenzied boom took place.

In the second diagram, two years later, the OBR is forced to acknowledge this. Corporations are just raking in the profits and sitting on them. The household sector, on the other hand, is a rolling catastrophe. Austerity has meant falling wages, less government spending on social services (or anything else), and higher de facto taxes. This puts the squeeze on household budgets and people are forced to borrow. As a result, not only are households in overall deficit for the second time in British history, the situation is actually worse than it was in the years leading up to 2008.

And remember: it was a mortgage crisis that set off the 2008 crash, which almost destroyed the world economy and plunged millions into penury. Not a crisis in public debt. A crisis in private debt.

An inquiry

In 2015, around the time the original OBR predictions came out, I wrote an essay in the Guardian predicting that austerity and budget-balancing would create a disastrous crisis in private debt. Now it's so clearly, unmistakably, happening that even the OBR cannot deny it.

I believe the time has come for there be a public investigation - a formal public inquiry, in fact - into how this could be allowed to happen. After the 2008 crash, at least the economists in Treasury and the Bank of England could plausibly claim they hadn't completely understood the relation between private debt and financial instability. Now they simply have no excuse.

What on earth is an institution called the “Office for Budget Responsibility” credulously imagining corporate borrowing binges in order to suggest the government will balance the budget to no ill effects? How responsible is that? Even the second chart is extremely odd. Up to 2017, the top and bottom of the diagram are exact mirrors of one another, as they ought to be. However, in the projected future after 2017, the section below the line is much smaller than the section above, apparently seriously understating the amount both of future government, and future private, debt. In other words, the numbers don't add up.

The OBR told the New Statesman ​that it was not aware of any errors in its 2015 forecast for corporate sector net lending, and that the forecast was based on the available data. It said the forecast for business investment has been revised down because of the uncertainty created by Brexit. 

Still, if the “Office of Budget Responsibility” was true to its name, it should be sounding off the alarm bells right about now. So far all we've got is one mention of private debt and a mild warning about the rise of personal debt from the Bank of England, which did not however connect the problem to austerity, and one fairly strong statement from a maverick columnist in the Daily Mail. Otherwise, silence. 

The only plausible explanation is that institutions like the Treasury, OBR, and to a degree as well the Bank of England can't, by definition, warn against the dangers of austerity, however alarming the situation, because they have been set up the way they have in order to justify austerity. It's important to emphasise that most professional economists have never supported Conservative policies in this regard. The policy was adopted because it was convenient to politicians; institutions were set up in order to support it; economists were hired in order to come up with arguments for austerity, rather than to judge whether it would be a good idea. At present, this situation has led us to the brink of disaster.

The last time there was a financial crash, the Queen famously asked: why was no one able to foresee this? We now have the tools. Perhaps the most important task for a public inquiry will be to finally ask: what is the real purpose of the institutions that are supposed to foresee such matters, to what degree have they been politicised, and what would it take to turn them back into institutions that can at least inform us if we're staring into the lights of an oncoming train?